The European Parliament elections this month set the stage for a period of political transition in the European Union (EU). The mandate of the current European Commission will end in October. A new college will take up duty in November and set the agenda for the next five years. This moment of transition offers an opportunity to take stock of what the European Commission has achieved in the area of taxation and to look at future challenges for EU tax policies in the years ahead.
Tax policy in the EU resides in a complex political environment. Taxation remains at the core of national sovereignty, with governments being free to design their tax systems according to national preferences and economic interests, whilst respecting the EU legal framework. In fact, taxation is the last EU policy area where decision making exclusively relies on unanimity. At the same time, member states use their tax systems to compete for economic activity, considering tax policy as a strategic national policy tool. The impact of unilateral action on the functioning of the single market is not always given the attention it deserves when deciding on national measures.
Despite this situation, the tax debate at the European level has significantly changed over recent years. In the past, the focus of EU action was primarily on removing distortions to competition or preventing double taxation, both of which arise from the interaction of diverse national tax systems. Wider fairness or efficiency considerations from an EU perspective received less attention, notably because of the political sensitivities around the topic.
Interestingly, and maybe even somewhat surprisingly to some, this has changed over recent years. The economic and financial crisis increased the pressure to consolidate public budgets, including from the revenue side. It also launched a discussion on efficient and growth-friendly tax systems. On top of this, the 2014 Lux Leaks scandal, along with the many scandals that followed – the Offshore Leaks, Swiss Leaks, Bahamas Leaks, Panama Papers and Paradise Papers – revealed the weaknesses of the European and international tax systems. This raised awareness amongst European citizens of the need to make progress on transparency and tax justice. The fact that some groups of multinational companies and rich individuals were able to partly or fully escape taxation threatened tax morale and the social contract – in the EU and beyond. Public pressure to deliver fairer taxation increased substantially as a consequence.
A decisive role in building up political pressure for tax fairness in the EU came from the European Parliament and its tax investigations triggered by the recent scandals. Procedurally, the European Parliament has a mere consultative role in the tax legislation process. Politically, it has become a powerful voice in tax discussions, forcefully representing the interests of EU taxpayers and pushing for change.
The realisation of the urgent need to reform tax rules has not been confined to Europe – it has been a global movement. In recent years, the G20 and the OECD have played a crucial role in the fight against tax fraud and evasion, notably by setting the action plan against base erosion and profit shifting (BEPS). This, in turn, prompted a number of legislative actions taken at EU level.
In this regard, it is useful to recall that the competences of the EU and the OECD in the field of taxation are quite different. While the EU’s competences in this area are limited, as explained above, it still has the power to impose legally binding rules that must be applied by all member states. Moreover, through competition policy, the Commission has real power to prevent EU member states from attracting businesses through illicit state aids. The case of Apple in Ireland is emblematic of these practices.
While the OECD does not have this type of legal power, its agenda has been largely complementary with that of the EU, and the activities of both parties have been mutually reinforcing. The OECD launched the international debate against fraud and tax optimisation and encouraged countries to strengthen their legislation; the European Commission responded by translating the OECD’s recommendations into legislation that would apply across 28 member states.
Looking ahead, it is clear that the global tax debate and the ongoing reform of international tax rules will continue to shape the EU agenda. The contradiction between a rigid adherence to national sovereignty in taxation and the limitations of acting nationally in a globalised world is becoming increasingly obvious. External challenges – including major tax reforms of global economic players, such as the US, the Chinese belt and road initiative and the ever-expanding digitalised economy – all raise questions about how the EU should position itself vis-à-vis other global players on taxation, as the biggest single market in the world.
In addition to this, the EU will also have to decide how to address another fundamental challenge confronting tax policy in general today: the need for tax systems and administrations to adapt to digitalisation, data driven process and new technologies. This is essential both to ensure that tax bases remain stable and sustainable, and to redesign tax collection and enforcement for the modern age.
In summary, current political dynamics and technological developments offer many opportunities for the EU to act and shape the global debate in the field of taxation. The last five years have shown that the EU and its member states are able to deliver successfully when pressure is high. However, they have also shown that fundamental reforms can be hampered by the EU decision-making process for taxation, which is still based on unanimity. We have seen political stalemate lead to inaction in some key areas, even when inaction itself comes at a high cost. Therefore, a key challenge for the years ahead will be to better align the political agenda, the policy needs and the processes for decision making, to allow the EU tax policy to advance in a dynamic and practical way.
The combination of political will, public pressure and external forces of change, mentioned above, have resulted in an unprecedented level of activity in EU tax policy during the current Commission mandate. The Commission was a driving force behind this activity, pursuing three main objectives in its tax policy: increasing tax transparency; enhancing international tax cooperation; and ensuring more convergence and coordination of EU rules for corporate and value added taxes.
Measures to increase tax transparency top of the list of adopted legislation during the current mandate (see the table below for a full list of adopted legislation). The Commission launched its fair taxation campaign with a tax transparency package in 2015. Since then, major progress has been made in increasing openness and cooperation between member states on tax issues. Member states have agreed to automatically exchange information on tax rulings and on multinationals’ country-by-country reports. New EU rules will also ensure that tax authorities have access to anti-money laundering information. EU countries have started to share information on citizens’ financial accounts abroad too, putting an end to bank secrecy in the EU. As of 2020, new transparency requirements for intermediaries such as tax advisers and banks will provide greater oversight of companies’ and advisers’ activities when selling schemes. The Commission has also proposed public country-by-country reporting for multinational companies – although this proposal is still on the table of the Council.
| Commission proposals adopted and agreed by European Parliament and Council | Adoption by the Commission | Adoption by the Council |
|---|---|---|
| Automatic exchange of financial information between member states (Directive on administrative cooperation in the field of taxation, DAC2) | June 2013 (previous Commission) | 9 December 2014 |
| Automatic exchange of tax rulings between member states (DAC3) | October 2015 | 25 May 2016 |
| International transparency agreements with Switzerland, Andorra, Liechtenstein, and San Marino | Throughout 2015 and 2016 | Between 2015 and 2016 |
| Common EU list of non-cooperative tax jurisdictions (tax havens) | January 2016 (Communication) | 5 December 2017 |
| Automatic exchange of information among tax authorities on country-by-country reports (CBCR) of multinational companies (DAC4) | January 2016 | 25 May 2016 |
| Anti-Tax Avoidance Directive I (ATAD I) laying down rules against tax avoidance practices that directly affect the functioning of the internal market | January 2016 | 12 July 2016 |
| Access to Anti-Money Laundering information for tax authorities (DAC 5) | July 2016 | 6 December 2016 |
| Anti-Tax Avoidance Directive II (ATAD II) | October 2016 | 29 May 2017 |
| Directive on tax dispute resolution mechanisms in the EU | October 2016 | 10 October 2017 |
| ‘E-commerce VAT proposals’ | December 2016 | 5 December 2017 |
| ‘E-publication directive’ | 1 December 2016 | 2 October 2018 |
| Common system of value added tax (VAT): temporary application of a generalised reverse charge mechanism | 21 December 2016 | 20 December 2018 |
| Proposal on mandatory automatic exchange of information for intermediaries (DAC 6) | 21 June 2017 | 25 May 2018 |
| Proposal on administrative cooperation in the field of VAT | 30 November 2017 | 2 October 2018 |
In addition to the improved transparency and flow of information between member states’ tax administrations, the EU has taken action to strengthen international cooperation in tax matters. It is no secret that third countries around the world play an essential role in facilitating tax evasion and avoidance. The EU has therefore engaged in difficult but necessary discussions with its international partners – notably through the new EU listing process, which was conceived in 2016.
The EU listing process is a means of tackling non-EU countries’ tax systems which do not correspond to international tax good governance standards. In December 2017, the EU’s 28 finance ministers adopted the first EU blacklist of tax havens, along with a greylist of countries that would be monitored in their reforms. If many were sceptical about the effectiveness of this approach, it has proven its worth: more than 100 harmful tax regimes have been eliminated so far, and many countries have now aligned their tax transparency standards with international requirements. The EU list has encouraged around 70 jurisdictions to adhere to global transparency standards, the OECD’s anti-BEPS measures and the principles of fair tax competition. This is one of many examples of the synergies between the work of the OECD and the Commission. It is also proof that when member states are united behind a project, EU action can have real added value.
This work will continue in 2019 and beyond. The process of dialogue with the listed jurisdictions delivers real change. Despite this success, some criticise the fact that the listing process does not cover EU member states. There is a simple reason for this. The EU list was designed as an external policy instrument – to encourage our international partners to comply with the same standards that member states adhere to themselves. It should be underlined that every EU member state is already compliant with the criteria that they assess jurisdictions against in the EU listing process.
In addition, there are other more targeted and legally binding instruments at the EU’s disposal to combat aggressive intra-EU tax practices as they arise. The new Anti Tax Avoidance Directives (ATAD I and II), the work of the Code of Conduct Group and state aid procedures all play a role here. Furthermore, the European Semester has become an increasingly important channel for dealing with harmful tax practices within the EU. This is the instrument through which member states’ macroeconomic policies are assessed by the Commission. Aggressive tax planning practices in certain member states are examined very carefully, based on economic indicators from several different sources. This year, for the second consecutive year, a euro area recommendation was issued on aggressive tax planning. The issue has also been addressed in the specific countries reports of some member states.
In short, the EU has become a world leader in tax good governance – both domestically and in its external relations. It was the first region in the world to automatically exchange information and to push the bar of tax transparency to the highest possible level. It was the first to adopt the OECD BEPS measures and to translate them into binding law. It was also the first region in the world to have a common and coherent listing process, to promote higher standards worldwide.
The EU is also actively involved in the ongoing work of the OECD and the G20 to reform global taxation. The most recent subject on which we have worked particularly closely with the OECD is the taxation of digital activities, which brings me to the third pillar of the EU’s tax policy.
The last objective is the most ambitious and most difficult, because the reforms in this area are deeper and more structural, going beyond exchanging information and aligning with international standards. These reforms require member states to converge on often fundamental changes to their tax systems, from the starting point of very different national perspectives. They rely on member states accepting that the benefits of a coordinated approach in addressing key tax challenges outweigh the individual gains of isolated national solutions.
There have been some positive results in this coordination during the current mandate. For example, a major success was the adoption of the so-called VAT e-commerce proposal in December 2017 – the first major update of VAT rules for ten years, formed on cross border supplies of goods. The proposal removes the de minimis threshold for small consignments and makes imports from third countries liable to VAT from the first euro. This creates a level playing field between EU business and traders from third countries, which often used the current system to under-declare values and thereby avoid VAT payments. During this political mandate, the Council also adopted rules to strengthen cooperation between member states, enabling them to tackle VAT fraud more quickly and more efficiently, and an international agreement with Norway on administrative cooperation, combating fraud and recovery of claims in the field of VAT.
However, the fundamental proposal for a definitive VAT regime is still under negotiation. The current transitional system – in place for almost 25 years – is obviously unsuitable for our modern economy and costs up to €150bn a year in non-collected VAT. The Commission’s proposal aims to establish a one-stop shop system. This will make it much easier for businesses trading within the Union to complete their VAT formalities and will simplify VAT rules for cross-border sales. This should drastically reduce cross-border VAT fraud – which costs our member states around €50bn a year. The latest revelations by investigative journalists of the ‘Correctiv’ network confirm that the Commission was right to make VAT reform a political priority. The loss of tax revenues is substantial and not in line with fair and sustainable tax policy.
The same is true for the relaunch of the common consolidated corporate tax base (CCCTB) in 2016. Today, the coexistence of 28 corporate tax systems is not only an opportunity for tax arbitrage across the Union, but also a major handicap for the growth of companies in the single market. The CCCTB would provide a more favourable environment for companies operating in the single market, by allowing them to consider it as a single corporate tax jurisdiction. With the CCCTB, the corporate tax rules for multinationals and other companies that opt in would be the same across the EU. A group’s profit would be computed for the whole EU and for all of its constituent companies. This would then be shared among member states according to objective factors that cannot be easily manipulated (sales, assets and staff).
Member states have made progress with regard to the tax base definition, but a stronger political push is needed to come to a final agreement. The fact that another global economic player has just reformed its tax system could give new momentum to this discussion: the CCCTB would be a strong European response to the US tax reform, as well as the wider global tax reform discussions.
Another area in which the EU and the international agenda are intertwined is on the question of digital taxation. In 2017, the Commission launched an initiative to tax digital activities in the EU. These activities are often not captured by the current international rules and the problem continues to grow, at the pace of digitalisation itself. This threatens the long-term sustainability of public finances, distorts the conditions of competition for companies in the single market and undermines the most fundamental principles of tax justice.
The Commission put forward two proposals to ensure fair taxation of the digital economy in the EU. The first is to modernise the rules on corporation tax, by introducing the concept of a ‘significant digital presence’. The second is for the introduction of a temporary tax on the turnover generated by certain digital activities in the Union.
Despite intense political discussions, member states have not yet been able to reach a unanimous agreement on either proposal. With regard to the digital activities tax, some member states have now started to move forward on their own. This fragmented approach is a risk which the Commission tried to avoid with the proposed common EU approach to a digital services tax. However, the work that led the EU to a near compromise on this issue has not been in vain.
The issue of digital taxation is a political priority beyond the EU, and the EU’s initiative in proposing real solutions to the problem gave momentum to the global debate. The EU is now actively participating in the OECD discussions to find a solution that would re-establish fairness in international taxation: fairness between different companies; fairness between different categories of taxpayers; and fairness between countries. By speaking as 28 member states with one voice, the EU will increase its chances to really impact the global result.
The problem with speaking with one voice in EU tax policy, however, is that there has to be unanimity – and this is frequently difficult to achieve.
The stalemate on certain important structural reforms over the last five years shows the limits of the unanimity rule in tax matters. There is clearly a need to take decisions more effectively in the sensitive and strategic area of taxation.
That is why, in March 2019, the Commission took the initiative to launch a debate among member states, the European Parliament and all stakeholders about a possible move to qualified majority voting (QMV) in tax matters.
Although it is clear that progress here will be difficult – since member states need to unanimously agree to abandon unanimity for a specific tax – there are compelling arguments in favour of this move. First, the transition to QMV would allow the EU to react more quickly and effectively in an area where the challenges are now global and where the expectations of Europeans are immense.
Secondly, the transition to QMV would broaden the scope of tax policy in Europe. Unanimity has had a damaging effect on the EU’s wider policy priorities, as taxation is essential to many of the EU’s most ambitious projects, including economic and monetary union, the capital markets union, the digital single market, the 2030 EU framework for climate and the energy union.
Thirdly, the transition to QMV would strengthen the democratic legitimacy of tax decisions taken in the EU by making the European Parliament a co-legislator. Today, even if Parliament has fully taken up this issue, its role remains purely consultative when it comes to deciding on the policy responses. This raises clear issues regarding the European level of democracy and representation. It is time that the European Parliament, directly elected by EU citizens, is given a real say in the future of taxation in the EU.
The past five years have been marked by important progress in the field of EU tax policy, with the establishment of a robust new tax transparency framework, legally binding anti-avoidance rules and a comprehensive approach to external base erosion risks. Some ambitious structural reforms are still being negotiated, and it remains to be seen whether member states will manage to converge on these in the near future. In the meantime, the world of tax keeps developing at a fast pace.
What does this mean for European tax policy in the coming period? It is too early to speculate about what might be the legislative agenda of the next Commission. There are, however, emerging trends which will doubtlessly shape the policy environment.
The current tax agenda has largely been driven by the aftermath of the crisis and tax scandals. The need to re-establish tax fairness and stabilise revenues has shaped the global tax agenda and influenced the EU work on transparency and anti-tax avoidance measures. The debate has now shifted and stepped up a gear at international level with a broader discussion on the reallocation of taxing rights and a reflection on minimum effective taxation. This discussion is partly driven by the digital tax debate, where the Commission’s proposals sparked a new momentum internationally.
For the future, the question is where the locus of this debate will be. Will taxation continue to be driven at the G20 level, with direct impact on the legislative agenda in the EU? What role will the EU play in influencing the international debate? Will the EU be able to truly impact the discussion, or will it be limited to absorbing the results; i.e. implementing global agreements? The new international dynamic is an opportunity for the EU to coordinate better its position at the global level. This will become increasingly important as more and more players enter the global tax discussion.
In the crisis, all players had a mutual interest in combating the worst excesses of tax avoidance. They understood that they had to act fast and act together – not least due to high public pressure. The new international debate might create fewer incentives to work together for a better international tax system, when interests of industrialised, emerging and developing countries need to be aligned and broader consensus needs to be found. Yet such consensus building is also where the EU excels.
A separate but connected aspect of the global tax debate is the EU response to the US tax reform and to tax elements in other major initiatives by our international partners, such as the Chinese belt and road initiative. For an integrated economic market such as the EU, purely national responses to external developments could lead to further fragmentation and, in the case of corporate taxes, also to a race to the bottom. Coordinated responses at EU level offer member states more leverage in international negotiations, so this is what they should work together to achieve.
The rapid growth of the digitalised economy is changing tax bases and economic activities. Examples are the dematerialisation of goods and services, the emerging use cases for blockchain, the growth of cryptocurrencies, and the sharing and gig economy. These trends – largely driven by digitalisation – will impact not only the ease with which taxes can (or cannot) be collected, but also the revenue bases themselves, which might become even more global, mobile and fragmented in terms of clarity of where economic value is created. One important question will be how to secure government revenue in a world of quickly changing business models. The most workable answers to these global developments might well be found at EU, rather than national, level.
Related to this is the question of how to ensure that tax administrations become more effective and data driven in a digitalised world. While the EU has no specific legal competence in the administration of taxes, it can and should have a role in providing a platform for EU tax administrations to develop common strategies at national level, based on best practices in other member states.
Fair and efficient taxation are now the well-established principles of EU tax policy. The economic and financial crisis may be over, but the notion of tax justice remains totemic. A fair corporate tax system remains firmly in the interests of both businesses and individuals. However, beyond fairness and efficiency, how can tax policy help to deliver other policy goals? Global issues such as climate change and global warming, energy efficiency, health and wellbeing (alcohol, tobacco…) and sustainable development will continue to grow in importance in the coming years. Corrective taxation can play a positive role in delivering on the core objectives in these areas. The recent discussion on CO2 taxation is but one example of this. The coherence between EU tax policy and other key policy areas is an issue which is likely to move to central stage in the next Commission mandate.
Harnessing the opportunities of modern technologies is also likely to dominate the future tax agenda. In this new interconnected world, with data driven processes and platform economies, is it logical to continue to approach policy in an ‘analogue’ fashion? Currently, tax policy tends to be seen as something that governments impose on business and citizens. Given the new technological opportunities, to what extent can tax policy be done differently? Can digital solutions lead to new ways to build the relationship between government and business, where technology is part of the tax challenge and the design of the solution?
There is a real opportunity today to start building new alliances – to create a more inclusive approach where business and government together work upstream on policy design, rather than just downstream on policy implementation. A closer relation between government, taxpayers and all interested stakeholders will be necessary in this regard. The Commission has already established a strong example of such an inclusive approach, with the Platform for Tax Good Governance where member states, business and civil society discuss key tax issues together.
During the current political mandate, the EU has seen an unprecedented level of activity in taxation. The need for revenues in the consolidation process after the crisis and the many tax scandals pushed taxation and notably tax fairness to the top of the agenda. Some argue that business and member states now need time to implement and evaluate what has been achieved. Indeed, tax certainty is clearly an important element to consider in shaping the agenda for EU tax policy in the years ahead. At the same time, the tax world will continue to move quickly: technological progress, global challenges like climate change and a less stable international environment call for further reflection – and action – about how EU tax policy can best serve the member states and the single market they form together.
The role of the EU will be to show that a common approach to taxation can achieve far more than a myriad of diverse national approaches and can help to improve the competitiveness of the EU as whole – to the benefit of all its member states and the single market.
This article was prepared by the author in his personal capacity. The opinions expressed in this article are the author’s own and do not reflect the view of the European Commission.
The European Parliament elections this month set the stage for a period of political transition in the European Union (EU). The mandate of the current European Commission will end in October. A new college will take up duty in November and set the agenda for the next five years. This moment of transition offers an opportunity to take stock of what the European Commission has achieved in the area of taxation and to look at future challenges for EU tax policies in the years ahead.
Tax policy in the EU resides in a complex political environment. Taxation remains at the core of national sovereignty, with governments being free to design their tax systems according to national preferences and economic interests, whilst respecting the EU legal framework. In fact, taxation is the last EU policy area where decision making exclusively relies on unanimity. At the same time, member states use their tax systems to compete for economic activity, considering tax policy as a strategic national policy tool. The impact of unilateral action on the functioning of the single market is not always given the attention it deserves when deciding on national measures.
Despite this situation, the tax debate at the European level has significantly changed over recent years. In the past, the focus of EU action was primarily on removing distortions to competition or preventing double taxation, both of which arise from the interaction of diverse national tax systems. Wider fairness or efficiency considerations from an EU perspective received less attention, notably because of the political sensitivities around the topic.
Interestingly, and maybe even somewhat surprisingly to some, this has changed over recent years. The economic and financial crisis increased the pressure to consolidate public budgets, including from the revenue side. It also launched a discussion on efficient and growth-friendly tax systems. On top of this, the 2014 Lux Leaks scandal, along with the many scandals that followed – the Offshore Leaks, Swiss Leaks, Bahamas Leaks, Panama Papers and Paradise Papers – revealed the weaknesses of the European and international tax systems. This raised awareness amongst European citizens of the need to make progress on transparency and tax justice. The fact that some groups of multinational companies and rich individuals were able to partly or fully escape taxation threatened tax morale and the social contract – in the EU and beyond. Public pressure to deliver fairer taxation increased substantially as a consequence.
A decisive role in building up political pressure for tax fairness in the EU came from the European Parliament and its tax investigations triggered by the recent scandals. Procedurally, the European Parliament has a mere consultative role in the tax legislation process. Politically, it has become a powerful voice in tax discussions, forcefully representing the interests of EU taxpayers and pushing for change.
The realisation of the urgent need to reform tax rules has not been confined to Europe – it has been a global movement. In recent years, the G20 and the OECD have played a crucial role in the fight against tax fraud and evasion, notably by setting the action plan against base erosion and profit shifting (BEPS). This, in turn, prompted a number of legislative actions taken at EU level.
In this regard, it is useful to recall that the competences of the EU and the OECD in the field of taxation are quite different. While the EU’s competences in this area are limited, as explained above, it still has the power to impose legally binding rules that must be applied by all member states. Moreover, through competition policy, the Commission has real power to prevent EU member states from attracting businesses through illicit state aids. The case of Apple in Ireland is emblematic of these practices.
While the OECD does not have this type of legal power, its agenda has been largely complementary with that of the EU, and the activities of both parties have been mutually reinforcing. The OECD launched the international debate against fraud and tax optimisation and encouraged countries to strengthen their legislation; the European Commission responded by translating the OECD’s recommendations into legislation that would apply across 28 member states.
Looking ahead, it is clear that the global tax debate and the ongoing reform of international tax rules will continue to shape the EU agenda. The contradiction between a rigid adherence to national sovereignty in taxation and the limitations of acting nationally in a globalised world is becoming increasingly obvious. External challenges – including major tax reforms of global economic players, such as the US, the Chinese belt and road initiative and the ever-expanding digitalised economy – all raise questions about how the EU should position itself vis-à-vis other global players on taxation, as the biggest single market in the world.
In addition to this, the EU will also have to decide how to address another fundamental challenge confronting tax policy in general today: the need for tax systems and administrations to adapt to digitalisation, data driven process and new technologies. This is essential both to ensure that tax bases remain stable and sustainable, and to redesign tax collection and enforcement for the modern age.
In summary, current political dynamics and technological developments offer many opportunities for the EU to act and shape the global debate in the field of taxation. The last five years have shown that the EU and its member states are able to deliver successfully when pressure is high. However, they have also shown that fundamental reforms can be hampered by the EU decision-making process for taxation, which is still based on unanimity. We have seen political stalemate lead to inaction in some key areas, even when inaction itself comes at a high cost. Therefore, a key challenge for the years ahead will be to better align the political agenda, the policy needs and the processes for decision making, to allow the EU tax policy to advance in a dynamic and practical way.
The combination of political will, public pressure and external forces of change, mentioned above, have resulted in an unprecedented level of activity in EU tax policy during the current Commission mandate. The Commission was a driving force behind this activity, pursuing three main objectives in its tax policy: increasing tax transparency; enhancing international tax cooperation; and ensuring more convergence and coordination of EU rules for corporate and value added taxes.
Measures to increase tax transparency top of the list of adopted legislation during the current mandate (see the table below for a full list of adopted legislation). The Commission launched its fair taxation campaign with a tax transparency package in 2015. Since then, major progress has been made in increasing openness and cooperation between member states on tax issues. Member states have agreed to automatically exchange information on tax rulings and on multinationals’ country-by-country reports. New EU rules will also ensure that tax authorities have access to anti-money laundering information. EU countries have started to share information on citizens’ financial accounts abroad too, putting an end to bank secrecy in the EU. As of 2020, new transparency requirements for intermediaries such as tax advisers and banks will provide greater oversight of companies’ and advisers’ activities when selling schemes. The Commission has also proposed public country-by-country reporting for multinational companies – although this proposal is still on the table of the Council.
| Commission proposals adopted and agreed by European Parliament and Council | Adoption by the Commission | Adoption by the Council |
|---|---|---|
| Automatic exchange of financial information between member states (Directive on administrative cooperation in the field of taxation, DAC2) | June 2013 (previous Commission) | 9 December 2014 |
| Automatic exchange of tax rulings between member states (DAC3) | October 2015 | 25 May 2016 |
| International transparency agreements with Switzerland, Andorra, Liechtenstein, and San Marino | Throughout 2015 and 2016 | Between 2015 and 2016 |
| Common EU list of non-cooperative tax jurisdictions (tax havens) | January 2016 (Communication) | 5 December 2017 |
| Automatic exchange of information among tax authorities on country-by-country reports (CBCR) of multinational companies (DAC4) | January 2016 | 25 May 2016 |
| Anti-Tax Avoidance Directive I (ATAD I) laying down rules against tax avoidance practices that directly affect the functioning of the internal market | January 2016 | 12 July 2016 |
| Access to Anti-Money Laundering information for tax authorities (DAC 5) | July 2016 | 6 December 2016 |
| Anti-Tax Avoidance Directive II (ATAD II) | October 2016 | 29 May 2017 |
| Directive on tax dispute resolution mechanisms in the EU | October 2016 | 10 October 2017 |
| ‘E-commerce VAT proposals’ | December 2016 | 5 December 2017 |
| ‘E-publication directive’ | 1 December 2016 | 2 October 2018 |
| Common system of value added tax (VAT): temporary application of a generalised reverse charge mechanism | 21 December 2016 | 20 December 2018 |
| Proposal on mandatory automatic exchange of information for intermediaries (DAC 6) | 21 June 2017 | 25 May 2018 |
| Proposal on administrative cooperation in the field of VAT | 30 November 2017 | 2 October 2018 |
In addition to the improved transparency and flow of information between member states’ tax administrations, the EU has taken action to strengthen international cooperation in tax matters. It is no secret that third countries around the world play an essential role in facilitating tax evasion and avoidance. The EU has therefore engaged in difficult but necessary discussions with its international partners – notably through the new EU listing process, which was conceived in 2016.
The EU listing process is a means of tackling non-EU countries’ tax systems which do not correspond to international tax good governance standards. In December 2017, the EU’s 28 finance ministers adopted the first EU blacklist of tax havens, along with a greylist of countries that would be monitored in their reforms. If many were sceptical about the effectiveness of this approach, it has proven its worth: more than 100 harmful tax regimes have been eliminated so far, and many countries have now aligned their tax transparency standards with international requirements. The EU list has encouraged around 70 jurisdictions to adhere to global transparency standards, the OECD’s anti-BEPS measures and the principles of fair tax competition. This is one of many examples of the synergies between the work of the OECD and the Commission. It is also proof that when member states are united behind a project, EU action can have real added value.
This work will continue in 2019 and beyond. The process of dialogue with the listed jurisdictions delivers real change. Despite this success, some criticise the fact that the listing process does not cover EU member states. There is a simple reason for this. The EU list was designed as an external policy instrument – to encourage our international partners to comply with the same standards that member states adhere to themselves. It should be underlined that every EU member state is already compliant with the criteria that they assess jurisdictions against in the EU listing process.
In addition, there are other more targeted and legally binding instruments at the EU’s disposal to combat aggressive intra-EU tax practices as they arise. The new Anti Tax Avoidance Directives (ATAD I and II), the work of the Code of Conduct Group and state aid procedures all play a role here. Furthermore, the European Semester has become an increasingly important channel for dealing with harmful tax practices within the EU. This is the instrument through which member states’ macroeconomic policies are assessed by the Commission. Aggressive tax planning practices in certain member states are examined very carefully, based on economic indicators from several different sources. This year, for the second consecutive year, a euro area recommendation was issued on aggressive tax planning. The issue has also been addressed in the specific countries reports of some member states.
In short, the EU has become a world leader in tax good governance – both domestically and in its external relations. It was the first region in the world to automatically exchange information and to push the bar of tax transparency to the highest possible level. It was the first to adopt the OECD BEPS measures and to translate them into binding law. It was also the first region in the world to have a common and coherent listing process, to promote higher standards worldwide.
The EU is also actively involved in the ongoing work of the OECD and the G20 to reform global taxation. The most recent subject on which we have worked particularly closely with the OECD is the taxation of digital activities, which brings me to the third pillar of the EU’s tax policy.
The last objective is the most ambitious and most difficult, because the reforms in this area are deeper and more structural, going beyond exchanging information and aligning with international standards. These reforms require member states to converge on often fundamental changes to their tax systems, from the starting point of very different national perspectives. They rely on member states accepting that the benefits of a coordinated approach in addressing key tax challenges outweigh the individual gains of isolated national solutions.
There have been some positive results in this coordination during the current mandate. For example, a major success was the adoption of the so-called VAT e-commerce proposal in December 2017 – the first major update of VAT rules for ten years, formed on cross border supplies of goods. The proposal removes the de minimis threshold for small consignments and makes imports from third countries liable to VAT from the first euro. This creates a level playing field between EU business and traders from third countries, which often used the current system to under-declare values and thereby avoid VAT payments. During this political mandate, the Council also adopted rules to strengthen cooperation between member states, enabling them to tackle VAT fraud more quickly and more efficiently, and an international agreement with Norway on administrative cooperation, combating fraud and recovery of claims in the field of VAT.
However, the fundamental proposal for a definitive VAT regime is still under negotiation. The current transitional system – in place for almost 25 years – is obviously unsuitable for our modern economy and costs up to €150bn a year in non-collected VAT. The Commission’s proposal aims to establish a one-stop shop system. This will make it much easier for businesses trading within the Union to complete their VAT formalities and will simplify VAT rules for cross-border sales. This should drastically reduce cross-border VAT fraud – which costs our member states around €50bn a year. The latest revelations by investigative journalists of the ‘Correctiv’ network confirm that the Commission was right to make VAT reform a political priority. The loss of tax revenues is substantial and not in line with fair and sustainable tax policy.
The same is true for the relaunch of the common consolidated corporate tax base (CCCTB) in 2016. Today, the coexistence of 28 corporate tax systems is not only an opportunity for tax arbitrage across the Union, but also a major handicap for the growth of companies in the single market. The CCCTB would provide a more favourable environment for companies operating in the single market, by allowing them to consider it as a single corporate tax jurisdiction. With the CCCTB, the corporate tax rules for multinationals and other companies that opt in would be the same across the EU. A group’s profit would be computed for the whole EU and for all of its constituent companies. This would then be shared among member states according to objective factors that cannot be easily manipulated (sales, assets and staff).
Member states have made progress with regard to the tax base definition, but a stronger political push is needed to come to a final agreement. The fact that another global economic player has just reformed its tax system could give new momentum to this discussion: the CCCTB would be a strong European response to the US tax reform, as well as the wider global tax reform discussions.
Another area in which the EU and the international agenda are intertwined is on the question of digital taxation. In 2017, the Commission launched an initiative to tax digital activities in the EU. These activities are often not captured by the current international rules and the problem continues to grow, at the pace of digitalisation itself. This threatens the long-term sustainability of public finances, distorts the conditions of competition for companies in the single market and undermines the most fundamental principles of tax justice.
The Commission put forward two proposals to ensure fair taxation of the digital economy in the EU. The first is to modernise the rules on corporation tax, by introducing the concept of a ‘significant digital presence’. The second is for the introduction of a temporary tax on the turnover generated by certain digital activities in the Union.
Despite intense political discussions, member states have not yet been able to reach a unanimous agreement on either proposal. With regard to the digital activities tax, some member states have now started to move forward on their own. This fragmented approach is a risk which the Commission tried to avoid with the proposed common EU approach to a digital services tax. However, the work that led the EU to a near compromise on this issue has not been in vain.
The issue of digital taxation is a political priority beyond the EU, and the EU’s initiative in proposing real solutions to the problem gave momentum to the global debate. The EU is now actively participating in the OECD discussions to find a solution that would re-establish fairness in international taxation: fairness between different companies; fairness between different categories of taxpayers; and fairness between countries. By speaking as 28 member states with one voice, the EU will increase its chances to really impact the global result.
The problem with speaking with one voice in EU tax policy, however, is that there has to be unanimity – and this is frequently difficult to achieve.
The stalemate on certain important structural reforms over the last five years shows the limits of the unanimity rule in tax matters. There is clearly a need to take decisions more effectively in the sensitive and strategic area of taxation.
That is why, in March 2019, the Commission took the initiative to launch a debate among member states, the European Parliament and all stakeholders about a possible move to qualified majority voting (QMV) in tax matters.
Although it is clear that progress here will be difficult – since member states need to unanimously agree to abandon unanimity for a specific tax – there are compelling arguments in favour of this move. First, the transition to QMV would allow the EU to react more quickly and effectively in an area where the challenges are now global and where the expectations of Europeans are immense.
Secondly, the transition to QMV would broaden the scope of tax policy in Europe. Unanimity has had a damaging effect on the EU’s wider policy priorities, as taxation is essential to many of the EU’s most ambitious projects, including economic and monetary union, the capital markets union, the digital single market, the 2030 EU framework for climate and the energy union.
Thirdly, the transition to QMV would strengthen the democratic legitimacy of tax decisions taken in the EU by making the European Parliament a co-legislator. Today, even if Parliament has fully taken up this issue, its role remains purely consultative when it comes to deciding on the policy responses. This raises clear issues regarding the European level of democracy and representation. It is time that the European Parliament, directly elected by EU citizens, is given a real say in the future of taxation in the EU.
The past five years have been marked by important progress in the field of EU tax policy, with the establishment of a robust new tax transparency framework, legally binding anti-avoidance rules and a comprehensive approach to external base erosion risks. Some ambitious structural reforms are still being negotiated, and it remains to be seen whether member states will manage to converge on these in the near future. In the meantime, the world of tax keeps developing at a fast pace.
What does this mean for European tax policy in the coming period? It is too early to speculate about what might be the legislative agenda of the next Commission. There are, however, emerging trends which will doubtlessly shape the policy environment.
The current tax agenda has largely been driven by the aftermath of the crisis and tax scandals. The need to re-establish tax fairness and stabilise revenues has shaped the global tax agenda and influenced the EU work on transparency and anti-tax avoidance measures. The debate has now shifted and stepped up a gear at international level with a broader discussion on the reallocation of taxing rights and a reflection on minimum effective taxation. This discussion is partly driven by the digital tax debate, where the Commission’s proposals sparked a new momentum internationally.
For the future, the question is where the locus of this debate will be. Will taxation continue to be driven at the G20 level, with direct impact on the legislative agenda in the EU? What role will the EU play in influencing the international debate? Will the EU be able to truly impact the discussion, or will it be limited to absorbing the results; i.e. implementing global agreements? The new international dynamic is an opportunity for the EU to coordinate better its position at the global level. This will become increasingly important as more and more players enter the global tax discussion.
In the crisis, all players had a mutual interest in combating the worst excesses of tax avoidance. They understood that they had to act fast and act together – not least due to high public pressure. The new international debate might create fewer incentives to work together for a better international tax system, when interests of industrialised, emerging and developing countries need to be aligned and broader consensus needs to be found. Yet such consensus building is also where the EU excels.
A separate but connected aspect of the global tax debate is the EU response to the US tax reform and to tax elements in other major initiatives by our international partners, such as the Chinese belt and road initiative. For an integrated economic market such as the EU, purely national responses to external developments could lead to further fragmentation and, in the case of corporate taxes, also to a race to the bottom. Coordinated responses at EU level offer member states more leverage in international negotiations, so this is what they should work together to achieve.
The rapid growth of the digitalised economy is changing tax bases and economic activities. Examples are the dematerialisation of goods and services, the emerging use cases for blockchain, the growth of cryptocurrencies, and the sharing and gig economy. These trends – largely driven by digitalisation – will impact not only the ease with which taxes can (or cannot) be collected, but also the revenue bases themselves, which might become even more global, mobile and fragmented in terms of clarity of where economic value is created. One important question will be how to secure government revenue in a world of quickly changing business models. The most workable answers to these global developments might well be found at EU, rather than national, level.
Related to this is the question of how to ensure that tax administrations become more effective and data driven in a digitalised world. While the EU has no specific legal competence in the administration of taxes, it can and should have a role in providing a platform for EU tax administrations to develop common strategies at national level, based on best practices in other member states.
Fair and efficient taxation are now the well-established principles of EU tax policy. The economic and financial crisis may be over, but the notion of tax justice remains totemic. A fair corporate tax system remains firmly in the interests of both businesses and individuals. However, beyond fairness and efficiency, how can tax policy help to deliver other policy goals? Global issues such as climate change and global warming, energy efficiency, health and wellbeing (alcohol, tobacco…) and sustainable development will continue to grow in importance in the coming years. Corrective taxation can play a positive role in delivering on the core objectives in these areas. The recent discussion on CO2 taxation is but one example of this. The coherence between EU tax policy and other key policy areas is an issue which is likely to move to central stage in the next Commission mandate.
Harnessing the opportunities of modern technologies is also likely to dominate the future tax agenda. In this new interconnected world, with data driven processes and platform economies, is it logical to continue to approach policy in an ‘analogue’ fashion? Currently, tax policy tends to be seen as something that governments impose on business and citizens. Given the new technological opportunities, to what extent can tax policy be done differently? Can digital solutions lead to new ways to build the relationship between government and business, where technology is part of the tax challenge and the design of the solution?
There is a real opportunity today to start building new alliances – to create a more inclusive approach where business and government together work upstream on policy design, rather than just downstream on policy implementation. A closer relation between government, taxpayers and all interested stakeholders will be necessary in this regard. The Commission has already established a strong example of such an inclusive approach, with the Platform for Tax Good Governance where member states, business and civil society discuss key tax issues together.
During the current political mandate, the EU has seen an unprecedented level of activity in taxation. The need for revenues in the consolidation process after the crisis and the many tax scandals pushed taxation and notably tax fairness to the top of the agenda. Some argue that business and member states now need time to implement and evaluate what has been achieved. Indeed, tax certainty is clearly an important element to consider in shaping the agenda for EU tax policy in the years ahead. At the same time, the tax world will continue to move quickly: technological progress, global challenges like climate change and a less stable international environment call for further reflection – and action – about how EU tax policy can best serve the member states and the single market they form together.
The role of the EU will be to show that a common approach to taxation can achieve far more than a myriad of diverse national approaches and can help to improve the competitiveness of the EU as whole – to the benefit of all its member states and the single market.
This article was prepared by the author in his personal capacity. The opinions expressed in this article are the author’s own and do not reflect the view of the European Commission.
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